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Problem 1. (14 marks) Nuestras Vidas is a women's cooperative located in Guatemala. The women make wallets that are then shipped to North America and Europe for sale. The material for the wallets is purchased from a sister cooperative that makes fabric in native patterns. The standard cost card for the wallets follows: Direct Materials (.74 yards at $7.95 per yard) Direct Labour (3.12 hours at $8.60 per hour) Variable Overhead (3.12 hours at $.25 per hour) Fixed Overhead (3.12 hours at $1.8 per hour) Total Cost to Manufacture $5.88 26.83 .78 5.62 $39.11 During March, the women produced 8,360 wallets and sold 10,300. The direct material price standard is based on the amount paid for the pattern and quality desired. A just-in-time purchasing system is in place. The direct materials quantity standard is based on the expected yardage for each wallet, adjusted by necessary rework when imperfections are found in the fabric and by wastage due to production errors. In March 26,000 yards of fabric were purchased at a total cost of $212,700. 25,698 yards were used in production. The direct labour rate standard is based on the living wage necessary to provide each worker with adequate earnings to support her family. No benefits are provided for. Each worker receives an annual pay increase of 10%. The direct labour quantity standard is based on time required to produce one unit, adjusted by productivity estimations as well as quality control issues related to the fabric and to production errors. Historically, more experienced workers are able to work more accurately and rapidly. In March, 28,680 hours were worked. Payroll amounted to $222,400. a. Compute the direct materials quantity variance b. Compute the direct labour rate variance Problem 1. (continued) c. Compute the direct labour efficiency variance d. Speculate as to the likely cause of the two labour related variances. Problem 2. (17 marks) Big Firm has many divisions. Managers are independent decision makers and are compensated on the basis of net income. Mining Division produces gold. Coin Division produces collectible gold coins. Each coin contains 4 ounces of gold. Contribution format income statements for the two divisions before any potential transfer follow: Capacity Unit sales Sales VC CM FC NI Mining 150,000 ounces 150,000 ounces $810,000 517,500 $292,500 300,000 ($7,500) Coin 40,000 units 18,000 units $2,700,000 1,015,200 $1,684,800 900,000 $784,800 The manager of Mining suggests that a transfer of gold to Coin Division might be best for the company as a whole. He believes that the transfer will save him $1.00 per ounce in variable selling costs. The manager of Coin Divisions states that the transfer will save her $4 per unit (per coin) in set-up costs. a. What is the range for the transfer price? b. Assume a transfer price of $2.60 is agreed upon. Show how the contribution income statements for the two divisions would look assuming the transfer happens. Problem 2. (continued c. Which manager has the most incentive to agree to a transfer? Explain. Problem 3. (21 marks) ABC Firm makes three products: small, medium and large. The firm applies overhead on the basis of machine hours. Information for the products follows: Capacity (per month) Unit Sales (per month) Selling price Machine hours per unit DL hours per unit V man cost per unit FOH per unit Small 30,000 21,400 $10.50 Medium 25,000 18,300 $40.95 Large 15,000 9,400 $65.45 1.2 1.7 3.4 3.6 5.2 1.9 $3.65 3.84 $10.25 10.88 $29.30 16.64 Note that each product is made on a separate production line. The production lines are not interchangeable. Variable selling costs are $1.00 per unit (for all products) and fixed selling and administrative costs are $50,000 per month. a. The firm has been approached by a retailer in a far-off land. They offer to buy 5,000 units of Large for $35 each. No additional selling or administrative costs would be incurred on this order. What would be the impact on net income of accepting this order? b. Would you recommend the firm accept the order? Explain. Problem 3. (continued) c. (Assume the order discussed above was not accepted). Suppose that the workers go on strike. The firm has been able to hire and train only enough workers to accomplish 50,000 direct labor hours. Based only on the impact on net income, which product(s) should be produced and how many units? d. Do you recommend scheduling the production according to your answer in part c? Explain. Problem 4. (16 marks) Future Firm prepares a master budget for each quarter of the year. The sales budget for the second quarter of 2016 follows: Unit Sales Price Sales April 6,400 120 $768,000 May 8,500 120 $1,020,000 June 3,900 120 $468,000 Total 18,800 120 $2,256,000 At the end of March, the balance in the cash account was $21,400. Sales in February were 5,000 units. Sales in March were 5,500 units. Inventory at the end of March was $37,500. Predicted sales in units for July are 6,000. 30% of all sales are on account. Of the sales on account, 40% are collected in the month of the sale, 30% in the month following the sale and 25% in the second month after the sale. The firm requires a cash balance of $30,000 to be maintained at all times. Inventory levels are monitored very closely. At the end of each month, inventory amounting to 25% of the following month's sales must be on hand. Unit cost for the product is $25. a. Prepare a cash collections for the appropriate budget period. b. What is the purpose of the cash collections budget? Problem 5. (10 marks) No computations are required for this problem. Payrolls R Us manages payment of employees for small to medium sized firms that do not have the resources to process payroll in house. Clients transmit time-cards either electronically or in hard copy. Payrolls R Us then cleans the data, looking for potential reporting errors or outliers, determines the amount earned by each employee, cuts the checks and files payroll related returns. In addition, the firm's analysts alert the client to any potential problems or chances for increased efficiencies based on the payroll information. Payrolls R Us uses an ABC costing system. There are three cost pools. Data processing costs includes space, computer time, and salaries for those who handle the basic operations. Analysis costs includes space, compute time, salaries and forensic training for the employees who conduct the analysis. Customer services costs includes salaries, travel expenses, communication equipment and client relations training for the people who meet the clients either to sell the product or to discuss findings of the data processing or analysis departments with the client. The cost driver for data processing is the number of employees covered by the client's contract. The rate is $5.67 per employee per month. The cost driver for analysis is total payroll size of the client. The rate is $.001 per payroll dollar. The cost driver for customer service is contact hours with the client. The rate is $39.45 per contact hour. The firm uses a flat rate pricing system. Each client is charged $500 per month. Below is a comparison of the cost for the month of March for Sally's Gift shop (one of the smallest clients) and Jerry's Automotive Repair (one of the largest clients): Data Processing Analysis Customer Service Total Cost Sally's $56.70 36.00 39.45 $132.15 Jerry's $425.25 450.00 197.25 $1,072.50 a. Based on the information from the ABC system, do you believe the flat rate pricing should be continued? If not, what changes would you make? Explain. Problem 6. (12 marks) Accounting Rules is a for-profit educational institution. It guarantees that students who obey all the rules will pass the professional exam. Students must arrive at school no later than 7:00 a.m. They receive a high energy brain food meal and then attend classes until 6:00 p.m. Lunch is also served at school. Students who have not met minimum standards on the progress exams must stay on campus for mandatory individual tutoring sessions until 11:00 p.m. For the month of March, the following static budget was prepared (note that all costs should be driven by enrollment numbers except tutors): Students enrolled Students in tutoring Students that pass Variable Costs Food cost Tutoring Supplies Fixed Costs Physical Facilities Instructor Salaries Budget 5,000 500 4,900 Actual 4,500 420 4,450 Variance 500U 80F 450U $422,500 450,000 225,000 $402,300 $385,000 190,000 $20,200F 65,000F 35,000F 990,000 854,000 992,000 880,000 2,000U 26,000U a. Prepare a flexible budget analysis for the firm for the month of March. Do not forget to do the activity variances. Problem 6. (continued) b. What do you believe caused the variances (look at the variances as wholenot one by one). Problem 7. (10 marks) No computations are required for this problem. Big Corporation has two divisions: One operates in the eastern part of the country and the other in the west. The firm requires an ROI of at least 18% from all divisions. Information about the two divisions for the most recent month follows: One Two NI $194,400 $77,350 Break Even Sales DOL CM% $298,572 1.5 35.0% $180,364 2.3 55.0% 22.8% 1.09 24.9% 26.1% .84 21.9% ROS AT ROI a. Suppose you were given the opportunity to become manager of one of these divisions. Which one would you choose? Explain your